Fitch cuts rating for Spain's two largest banks

Fitch on Monday downgraded its credit rating for Spain's two largest banks, Santander and BBVA, by two notches in a move that follows the agency's downgrade of Madrid's sovereign rating last week.

Fitch slashed its rating for Santander, the biggest in the eurozone by market value, and BBVA to BBB+ from A, placing them just three levels above junk territory. Both banks were given a negative outlook.

The downgrades "reflect similar concerns to those that have affected the Spanish sovereign rating, in particular, that Spain is forecasted to remain in recession through the remainder of this year and 2013 compared to the previous expectation that the economy would benefit from a mild recovery," a statement said.

Fitch on Thursday cut Spain's sovereign credit rating by three notches to BBB, citing ballooning estimates of the cost of a banking crisis, mushrooming debt and deepening recession.

"Santander's and BBVA's long-term issuer default ratings are one notch above Spain's sovereign rating, reflecting their geographical diversification, strong financial performance and a proven capacity to absorb credit shocks," the statement said.

Santander and BBVA benefit from their international diversification in retail banking, which gives them the capacity to generate earnings internationally, making up for muted results in Spain and supporting good recurring performance.

While this sets them apart from more domestically-focused Spanish banks, Fitch said it "does not entirely mitigate the rating constraints arising from their domicile."

"Growth prospects for emerging markets in which Santander and BBVA subsidiaries operate have been revised down and they are not entirely immune to global economic trends but earnings from these markets will continue to contribute significantly to group earnings at both institutions," it added.

Spain's banking sector has been weakened by reckless lending in a property market that crashed in 2008.

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